Plantation - RHB Invest 2020-11-02: V For Volatility; Still NEUTRAL On Sector

WILMAR INTERNATIONAL LIMITED (SGX:F34) BUMITAMA AGRI LTD. (SGX:P8Z) GOLDEN AGRI-RESOURCES LTD (SGX:E5H) FIRST RESOURCES LIMITED (SGX:EB5)

Plantation - V For Volatility; Still NEUTRAL On Sector

We revise our CPO price assumptions for 2020-2021, to reflect the slight y-o-y increase to MYR2,650/tonne for 2021F, from MYR2,600/tonne in 2020F. Supply and demand (S&D) dynamics are relatively balanced for 2021, but we believe there are three wild cards that could derail this equilibrium.
Maintain NEUTRAL on plantation sector.
Top Picks: Wilmar (SGX:F34), First Resources (SGX:EB5), Sarawak Oil Palms and Kuala Lumpur Kepong.

CPO prices have been very volatile of late, racing past the MYR3,000/tonne mark before falling back below, and subsequently swinging up and down by MYR50.00-100.00/tonne on a daily basis.
Other than the usual supply and demand dynamics, we believe there are three major swing factors that could determine the price direction for CPO in 2021F: soybean prices (which ties in with weather issues), crude oil prices (which ties in with COVID-19), and labour issues in Malaysia.

Overall, the latest Oil World and the United States Department of Agriculture (USDA) forecasts indicate S&D dynamics should be relatively balanced in 2021F – if production returns to relative normalcy, while demand also recovers gradually post-pandemic. Based on the latest Oil World data, the 17 oils & fats as well as the 8-vegetable oil complex are expected to see declines in stock/usage ratios in 2021, while the 10-oilseed complex is expected to post a slight increase, due to the bumper soybean crops anticipated from the US.
For CPO, the stock/usage ratio is also expected to decline in 2021, while the soybean oil (SBO) ratio is anticipated to be flat y-o-y. With lower stock/usage ratios, particularly for CPO, which is expected to fall to below the historical average of 17.5%, this should indicate CPO prices should remain buoyed above MYR2,500/tonne in 2021F.

Our base case assumptions for our CPO outlook are that:
1. La Nina will not worsen and soybean crops will not be significantly affected in the US and South America. This means that soybean prices may see some correction, leading to CPO prices also correcting somewhat in the near term;
2. COVID-19 will be relatively contained in 2021, and our higher crude oil price assumptions will hold for 2021F. This would mean that the biodiesel mandate in Indonesia will be adhered to, at least until Oct 2021; and
3. the labour shortage will not be too intense in Malaysia in 2021F (assuming the Government makes some changes to its foreign labour policy) and we expect productivity to improve, as per Oil World’s forecasts for Malaysia and Indonesia.

We are raising our CPO price assumptions to MYR2,600/tonne for 2020 (from MYR2,400 per tonne), and to MYR2,650/tonne for 2021 (from MYR2,500).
All in, we increase forecasts for companies under our coverage by 7-10% for 2020-2021, while 2022 numbers are minimally changed.

Despite our expectation that CPO prices will be slightly higher in 2021, the y-o-y rise from the average of MYR2,600/tonne in 2020 is a mere 2%. In addition, an average of MYR2,650/tonne for 2021F also implies a downside from current prices of MYR2,800-2,900/tonne, while regional earnings growth for 2021F is not all that exciting, at 14% y-o-y.
See reports:

Juliana Cai RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-11-02

SGX Stock Analyst Report BUY MAINTAIN BUY 5.600 UP 5.45

BUY MAINTAIN BUY 0.650 SAME 0.650

SELL MAINTAIN SELL 0.130 SAME 0.130

BUY UPGRADE HOLD 1.450 SAME 1.450